Insuring against disasters

Preparing a business for the threat of natural disasters entails the management of a wide range of risks. Aside from mitigating the danger of injury and loss of life and ensuring business continuity in the event of a disaster, business owners also have to consider how to deal with the financial damage as result of destroyed property, equipment, stock or other assets as well as the loss of income from discontinued business operations.
 
The risk of financial losses or the loss of assets requires a different set of risk management measures. Risk transfer through insurance is often a popular solution for risks that have a low probability but a high impact and potential damage, for example fires, floods or storms.
 
In practice however this may require a number of different types of insurance to cover all the potential losses that a company faces from a disaster.
 
“There is no disaster insurance per se,” says Annette Jim, the chief underwriting officer at Island Heritage, who explains that a business purchases insurance cover based on its own particular risk exposures.
 
“Most businesses would have similar type policies,” she says. “For example: insurance to cover their assets (building, contents, plant, machinery and equipment, stock etc), the loss of revenue should their business be impacted by an insured peril, which damages or totally destroys their asset (business interruption), their liability exposure to third parties for damage or injury resulting from the business operations (public/products liability), their liability to employees who are injured in the course of their employment (employers liability/workmen’s compensation), their liability to shareholders (D&O coverage) or their liability for giving wrongful advice (professional indemnity) and so on.”
 
In Cayman, the most common risk faced by businesses from a business continuity perspective would be the risks posed by the catastrophe perils of hurricanes and earthquakes. Consequently in terms of insurance, businesses should ensure that their policies include cover against losses from hurricane and earthquake and this applies not only to the insurance covering their building, contents, plant, machinery and equipment but also in respect of their motor insurance policies.
 
Additionally they should examine whether they need to effect business interruption insurance, which in effect replaces the profit lost while their business operations are being reinstated, she says.
 
However, while the purchase of insurance is important, Jim argues, businesses should also look at physical risk improvements, which will reduce their risk exposure and to an extent may also benefit a company in terms of discounted premiums. These measures could include for instance the construction of buildings 4ft to 8ft higher than the surrounding land, installing hurricane shutters, hurricane impact glass, flood gates and pumps. It also includes having contingency plans in place for IT systems and business operations.  
 
“Whilst insurance will cover the damage sustained, it cannot begin to recompense an insured for the inconvenience and hardship when a loss occurs,” she says.
 
Commercial property and contents insurance differs from residential property insurance mainly in the extent and cost of the coverage. “Coverage is broader for home policies than for commercial policies,” says Jim. “The operating principle is that whereas a commercial operation has the wherewithal to seek professional services to adequately advise them of the business exposures, homeowners are not in this position.“
 
As a result home policies will include insurance coverage for exposures such as theft/larceny, public liability, employer’s liability and all risks for valuables at comparatively little additional cost.  If a commercial operation aims to cover these exposures through insurance, the business is expected to purchase separate insurance policies for each type of exposure and the rates charged would be substantially higher than for a home.
 
So while a residential homeowner who has contents insurance would be able to insure against certain other risks such as theft under the same policy for an adjusted premium, a commercial business would have to purchase these types of insurance covers under separate policies.
 
If a company wants to protect its inventory it can, in addition to the purchase of fire and perils coverage for the inventory, consider business interruption cover. Business interruption insurance covers the insured commercial operation’s losses of profits while the physical premises/assets are being reconstructed or replaced. Business interruption insurance may cover profits that would have been earned had a property not been damaged by a covered disaster, operating expenses that would occur even if business operations have come to a halt or additional expenses incurred from operating out of a temporary location, while the original office location is being repaired or replaced.
 
However, it is always recommended that the business invests in risk management processes that would reduce or mitigate the loss exposure, explains Jim. “Particularly with respect to stock, one of the things we would recommend is that business owners consider elevating their stock at least 4ft off the ground to prevent water damage where the location is subject to flood.”
 
If a company owns property and leases this property to another party, the owner does need not take out insurance coverage, as they can incorporate the provision that the party leasing the property should carry the insurance coverage. This can include cover for the building itself as well as any liability exposures arising out of the other party occupying the property. Jim also suggests that the owner of the building should be a named insured under the lessee’s liability insurance policy and that a cross liability clause is included.
 
In terms of liability insurance, for example, when reoccupying a damaged office space after a hurricane, business owners must bear in mind that when an office space is damaged and not safe, an employer should not require an employee to work under such conditions, she says. “If an employer proceeds to require their employees to work under unsafe conditions there may be legal consequences.” 
 
In all other cases employers can affect workmen’s compensation or employer’s liability insurance coverage.  This policy covers the employer’s legal liability at common law and their statutory liability under the applicable workmen’s compensation legislation to employees for death, injuries or sickness which occurs as a result of their employment with the employer, she explains.
 
Premiums for coverage against natural disasters depend on a number of factors. From a revenue and expenditure perspective an insurer’s expenses are made up of reinsurance costs, management expenses, claims expenses, normal running expenses such as utilities, plus an amount for profit, Jim explains. 
 
“Theoretically speaking, an insurer tallies up all the expenses and based on the total aggregate (ie total sums insured for all the insurance policies that are issued) calculates the rate that is necessary to generate the revenue sufficient to cover the expenses.”  Reinsurance costs, in particular the cost of purchasing catastrophe reinsurance make up the bulk of the expenses faced by any property insurance company.  A property insurance company is therefore heavily dependent on its reinsurers.
 
When considering insurance it is important to remember that all insurance policies carry deductibles. Insurers impose deductibles for two reasons. Because of the deductible the insured continues to share some of the cost of any loss or damage to the insured item and therefore retains an interest in its adequate protection insured. In addition, deductibles eliminate the insurer’s administrative burden of handling many small losses, says Jim.    
 
She advises businesses to visit their insurance and sit down with the underwriter to go through their operations so that they can obtain proper advice as to what type of insurance coverage they require. Insurers are also a valuable resource to assist a business in risk management techniques that the business can affect to minimise losses.
 
As far as existing insurance cover is concerned, Jim recommends that all insured read their insurance policy to ensure that they know exactly what they have purchased and which types of exposures are covered.

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